The future of Social Security in one graph

By
Ezra Klein

This comes from the Strengthen Social Security Campaign, and it lists the impact of all of the various deficit-reduction plans on a medium-income Social Security beneficiary (click for a larger version):

It's worth noting that the "current law" line is looking at what Social Security promises to pay out under current law, not what it can afford to pay out under current law.

Ezra is now officially brain dead. "if congress does nothing when the trust fund is depleted in 2 years."

ROFLMAO. There is no "trust fund" It is NOTHING but non-negotiable IOUs from the US gov. If I set up a college trust fund for my kid and then raided it to buy cocaine and left an IOU from myself, THAT would be the parallel.

If a household making $43,084 saved 12.4% of their income from 22-64 and earned 3% real annual returns, it could buy a 35 year inflation adjusted annuity worth $21,084/yr (and retire at 65). If it earned 6.5% (historical real return to stocks), it would have $56,832/yr to retire on. Note that this value would potentially be greater, as I'm pretty sure a joint survivor's annuity would be cheaper as the odds or either spouse hitting 100 is fairly low. In the calculator I assumed 6% nominal investment returns and 3% inflation.

The cost of disability insurance is 1-3% of salary, we'll say 2%. Note that this buys disability insurance worth 60% of salary, or $25,850.40. Not sure what Social Security DI pays, but probably not nearly $26k.

http://www.costhelper.com/cost/finance/disability-insurance.html

If we allow the policy to run 2% of income and so retirement savings are only 10.4% of income, our household is still getting $17,688/yr in retirement assuming a 3% return and working from 22-64, retiring at 65, and not having political risk surrounding benefits. In addtion, the extra savings will either grow the capital stock or reduce the need for foreign investment (probably both), either way increasing national wealth.

At a minimum, I fail to see why Social Security isn't turned into a savings program with a government minimum benefit guarantee as the safety net.

Ezra should overlay this graph with one that shows the benefits paid out compared to the taxes paid in.

But alas, that would reveal the Ponzi scheme that is SS...or Medicare, or any other federal government program designed to redistribute wealth.

If progressives and the 'party of choice' really wanted to be intellectually honest, why not give people the choice to opt out of paying in to SS and Medicare, in return for forfeiting claims to their SS/Medicare benefits in the future?

Of course that would never work....since Ponzi schemes depend on the new investors (read: current workforce) paying in today so there is money to pay off the original investors (read: retirees) whose money is long gone, flushed down the drain of out-of-control government spending.

If Democrats really gave people a choice to participate in SS or Medicare, the scheme would completely collapse within a few years.

This is a dumb graph. Eventually every line trends to zero because they are simply holding real median income constant (assuming no growth) and then since every plan says the rate of GROWTH in benefits must change from current law, then the benefit eventually goes to zero in dollars growing at the higher (current law) growth rate.

Another way to look at would be median benefit under current law in constant CPI dollars. The benefit would constantly go up and go to infinity as time goes on if I wanted to make a different, narrow simplistic political point.

Ezra, again, this is simply embarrassing. Putting a graph that obfuscates the issue and simply advancing the meme that benefits go to nothing under proposed reform plans.
You should try cutting down your daily posts to about 2 or 3 as the quality has deteriorated precipitously. You have either lost focus or have decided to pull a Weigel and get your knee pads out for pay with integrity being the price.

This is your JOB. The output should have some vestige of PROFESSIONALISM, which implies the posts should exhibit competency and rigor. A few clowns at there desk shouldn't be able to pick apart your posts in under ten minutes.

Actually, this graph is extraordinarily helpful. Very little has been done to show exactly who cuts to Social Security would affect. Bowles, Simpson and Rivlin have claimed time and again that we can "strengthen" Social Security--ie shore up its finances for the next 75 years--without hurting those who need it. I think it's safe to say that someone making $43,000 a year relies on Social Security considerably in retirement. As this chart shows, their current annual benefit of $16,674, which is just 55% above the poverty line, would be cut by more than $2,300 under Domenici-Rivlin, $4,000 under Bowles-Simpson and more than $7,000 under Ryan's plan.

Bowles & Simpson, who claim to be trying to save beneficiaries from the immediate 22% cut they will suffer if Congress takes no action to shore up the Trust Fund, would end up only providing medium earners $200 more than if nothing was done. So much for strengthening or saving it! Ha.

Although, cdosquared5, your ad hominem attacks on Ezra are both unwarranted and pathetic, I can understand why you might be skeptical of how the dollar amounts are calculated. I took the liberty of researching the different proposals in question in this graph. The amounts are in wage-indexed 2010 dollars. That is the way the SSA measures growth or decline in benefits for the long-term. If it were in constant 2010 dollars the amounts would be much larger but the decline would be the same.

If anyone commenting on this blog were as wonkish as they claim to be they would take a look at the Social Security actuaries' page on the SSA website http://ssa.gov/oact/solvency/index.html. It lists all of the different recent proposals and how they affect different groups of beneficiaries. My guess is that whoever made this graph took the percentage reductions in the SSA's analyses, applied them to current monthly benefits, and then annualized everything.

A couple more things I've noticed:
Even under current law, benefits for people aged 65 are going down because the normal retirement age is now at 66 and will reach 67 in 2022. This is noteworthy. Before we begin raising the retirement age even further, should we not allow time to consider how the current changes affect retirement security and the labor market? The majority of beneficiaries claim benefits before the normal retirement age, choosing instead to take a 7% cut for every year below the NRA that they retire. For someone currently retiring at 62, that is a whopping 28% cut--for the rest of their lives! I'm betting that a whole lot of those people work in physically demanding jobs or have lost their job in late middle age. Otherwise, why would they take such a big cut?

Another thing. If anyone was wondering what makes Rep. Deutch's plan more generous, it is because he would index benefits to a special consumer price index (the CPI-E) created by the Bureau of Labor Statistics that is meant to be a more realistic estimate of the elderly's cost-of-living. The regular CPI-W does not weight medical costs in proportion to the chunk they take out of seniors' paychecks. This is really an important reform. All of the current reform proposals suggest adopting the chained CPI, which assumes the elderly can replace their current services with cheaper ones as prices goes up. Again, this does not take into account medical expenses that cannot be easily replaced. The SSA estimates it would result in a 0.3% cut in the COLA every year--beginning now, for current beneficiaries! That's 6% over 20 years. And we haven't even explored the full potential of the BLS's CPI-E! How come we have heard so little about Deutch's plan?

It is completely reasonable to assume that if Congress did not accept the various Commissions' proposals to gut Social Security, it would still fix it before the Trust Fund would no longer be able to pay full benefits. In fact, with retirees facing imminent cuts, it seems a whole lot more likely that Congress would do most of the fixing on the revenue side (where it is fairest and least harmful to the middle class).

Social Security has been paying benefits since 1940. It has been amended 50 times through the normal legislative process, including to shore up its financing on several occasions. Most notably, when the program was facing an imminent crisis in 1983, Congress acted with a compromise plan that had modest cuts (some of which we are still experiencing like the rising retirement age)and revenue increases. To suggest that this needs to be done now or never is to despair of the legislative process completely.

The argument but forth by many on the left that cuts now are superior to privatization later, is completely bogus and shows a typical lack of cohones. Privatization died in 2005, and it took the Bush presidency with it. If Ryan actually tries to push his plan, it will be the greatest gift the Democrats have ever received. We have already "locked in" that victory; there is no need to look back. The public is now looking to Democrats to do what we have always done protect Social Security from those who would balance th budget on the backs of today's young and middle class workers. From the looks of it, we younger folks are already going to suffer from a tougher, backlogged labor market; smaller and fewer benefits and pensions; and the greatest income inequality this country has ever seen.

With one hand we are renewing the Bush tax cuts for the top 2% and with the other, we are cutting Social Security? Have we no shame? Let's draw a line in the sand. Let's stand athwart history and yell, "Stop!" Starve the beast ends here. Let's scrap the cap on taxable payroll--currently at $106,800--and actually make everybody pay their fair share.

I'm sorry, will12, but contrary to what many of us in the professional sector might think, retirement insecurity is not merely the result of bad choices. Many people have seen their 401(k)s wiped out, gone bankrupt due to medical bills, seen their homes foreclosed, or spent their savings on necessities while they are unemployed. Not to mention that many "middle class" families live paycheck-to-paycheck on their stagnating salaries while housing, energy and health care costs skyrocket. Your remark sounds about as in touch with the current state of working America as Marie Antoinette was on the eve of the French Revolution. Have those who continue to enjoy economic prosperity in this country really become so aristocratic that we fail to even imagine the possibility that a person could fall on hard times through no fault of their own?

Ezra,
I don't think it does, but this graph should really include the increased benefits that stem from taxing employer-provided health benefits under Domenici-Rivlin, Bowles-Simpson, and Ryan's Roadmap. A large number of middle-class households would then be paying more into the system and also receiving higher benefits. This would have a substantial impact on this graph, especially in the later years.

The social security program was originally designed as an insurance program (see Federal Insurance Contributions Act) for lower class working people - not as a "savings towards retirement" program for the upper and middle classes, who were presumed capable of saving for their futures.

The theory was that since workers contributed to the wealth of their employers as well as to the overall wealth of the society, those who had directly benefited from their labors should contribute to an insurance plan to provide retirement benefits to low-paid workers.

But besides the callousness of politicians who irresponsibly raided the social security trust fund to pay for earmarks that benefited some well-heeled businessmen, there has evolved a general misunderstanding that money contributed to the trust fund is really money invested for the retirement of all contributors - not just marginally paid workers.

So the system appears to be a failing Ponzi scheme because everybody wants to take out what he "invested" and there are not enough younger workers to make up what has been lost to inflation - or has been siphoned off by politicians accepting big deficit budgets.

This is becoming a no-win situation because, over the past few decades, the prevailing attitude is that money paid into the social security system - like money paid in taxes - belongs to the person who earned it and as much as possible, should be kept out of the hands of governments, state and local. So most people think it is better to have governments borrow heavily to pay for services like national defense, police, fire, upkeep of roads, regulation of financial institutions, veterans benefits, etc. than to have an individual's earned income taxed to pay for it.

Yes, nowadays everybody is worried about deficit spending but nobody wants to pay more taxes. As long as that attitude prevails, not only will our children remain heavily in debt to the wealthy (and the Chinese) but chances for a decent retirement for poor workers will be diminishing.

I long for the time when, despite disruptive things like racism and religious differences, citizens felt that this was "one nation, indivisible, with liberty and justice for all" - not just a bunch of selfish individuals appalled at the idea of their government assisting our poorest workers.

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